The Soft Power of Russian Energy Imperialism

Here’s a quick pop quiz: Russia may not be a reliable energy partner for Europe because… A) state control over Gazprom and Rosneft guides decisions toward political, not commercial interests, as demonstrated by recent supply cut offs, unlawful expropriations, and hostility toward foreign investors. B) the Kremlin promotes non-competitive policies and encourages monopoly. C) because Russia is going to run out of natural gas. Well perhaps answer D), all of the above, may be the most appropriate, but today I wanted to give some attention to the issue of a looming gas shortage in Russia, as I feel that the decisions that have led us to the current situation speak volumes about the Russian government’s outlook on managing energy supplies in the context of playing energy politics.

Russia’s energy monopolies are undermining security of supply

In a cursory glance at the literature of imperialism, you often see the comparison between a type of “hard” imperialism, as practiced by the British at their peak of power, and a “soft” imperialism as characterized by the Pax Americana. Instead of armed garrisons and a union jack upon which the sun never set, the Americans discovered that business ties, Hollywood, and backdoor influence peddling was a more efficient way to shape outcomes in foreign countries. In some ways, Russian energy imperialism functions in the same ways. The hard power of the energy weapon can be exercised with overt cut offs and threats of forming a premature gas cartel, but state control over oil and gas can also be exercised more softly to further the business objectives of the national champions in acquiring assets abroad and non-energy assets locally (such as media). The frenzy of Gazprom’s MoAs and pipeline projects represents the fruits of the soft power approach, happening everywhere from Venezuela to Algeria to Italy to Germany to Hungary to Bulgaria and Greece. So much capital to dedicate to these ventures while production withers. It is precisely this insistence on spending oil and gas revenues on acquisitions instead of funding the development of new fields that is the driving force behind Russia’s coming natural gas shortage. How is it possible, you may ask, that the country with more than 26% global reserves, totaling more than 47 billion cubic meters, could possibly come up short? According to a recent important study by Alan Riley and Frank Umbach, Gazprom has spent nearly 18 billion euros outside the gas sector between 2003 and 2006 in an effort to acquire upstream assets in Europe and in neighboring transit countries. This combined with the disastrous policy toward foreign investors (49% maximum ownership in an energy company, monopoly pipeline operator), and Russia is looking more and more at risk to experience a gas shortfall. In exercising its soft power, the siloviki running Russia’s energy policy are placing a premium on expanding Gazprom’s tentacles while they can – actually being able to produce the gas in the future seems to be of secondary concern. In Riley and Umbach’s estimation, it is Germany that could become the biggest victim of the supply shortfalls in Russia:

However, from both a European and a strategic, economic standpoint, it is Germany, not Central or Eastern Europe, that faces the gravest threat. Dramatic reductions in natural gas deliveries could cause tremendous turbulence in the German economy. Due to the country’s size, these could spread to all of Europe. The situation is even more precarious for Germany because the shortfalls are likely to occur long before the Baltic Sea pipeline (Nord Stream) launched by ex-chancellor Schröder is connected to the network. Any shortfalls would hit the western EU states first and hardest, despite contractual agreements. This is especially true of Germany: as the largest European investor in Russia it would face lower and uncertain natural gas deliveries, and it would have reason to fear that its foreign investments in Russia would decline in value since any such shortfalls would cause the Russian economy to contract. The prospect of such shortfalls in natural gas delivery to Germany underscores the danger of pursuing a bilateral Sonderweg with Russia within the European Union. The Baltic Sea pipeline could prove to be a strategic mistake for Germany: on the one hand, the pipeline means increased dependence on Russian natural gas (which, when the pipeline is completed, will account for 60 percent of all gas imports, as compared to 42 percent in 2006). On the other hand, Germany has failed to persuade Russia to liberalize its energy markets. It has not secured the free flow of capital or the protection of foreign investors’ property rights, both of which are necessary to ensure the availability and supply of natural gas.

In conclusion, this report makes the typical call for stronger European efforts to bring Russia into a fair and equitable rule-based environment like the Energy Charter to get Moscow to recognize its contractual obligations and water down the political edge that energy policy has assumed. But so far the signs are not encouraging. Even the closest friends of the Kremlin in Berlin have been unable to coax Russia toward a liberalization of its energy markets, leading some to believe that the KGB instincts in the leadership not only can’t tolerate political competition, but also can’t stand to sit by and watch an unfettered market operate naturally.